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Wednesday, May 25, 2022

Lacking Loans?

When Cereplast Inc. decided a few years back to ramp up operations and expand in Europe, Chief Executive Frederic Scheer went looking for a bank loan.

He figured his El Segundo company, which he founded in 2001 and took public in 2005, would have little trouble securing traditional bank financing. He was wrong.

“We approached a lot of banks – at least 10 banks – but none were willing to extend any kind of lending,” Scheer said. “For small and medium-sized companies, accessing the banking system has become very, very challenging.”

Business owners and financial professionals alike acknowledge that the availability of credit for companies has decreased dramatically over the past few years.

Many banks argue that they are willing to lend, but finding creditworthy borrowers has become more of a challenge in this sluggish economy. Besides bankers’ normal concern over loan losses, experts say regulators are putting more pressure on banks to stick to the safest loans. Some distressed financial institutions, meanwhile, are hesitant to lend much at all until their balance sheets look better.

Small and midsize businesses are the special victims of these circumstances because they tend to be least capitalized and the most in need.

As a result, companies such as Cereplast, which makes biodegradable plastics that are increasingly popular in Europe, have had to re-evaluate growth plans.

Startups, including those with seemingly bright prospects, have sputtered on the runway without funding. Even established companies have complained their longstanding bank relationships have been cut or ended.

Some persistent companies eventually get bank loans, but others are turning to alternative outlets, such as non-profit community lenders and credit unions. As reported last week in the Business Journal, a half-dozen or so local developments are getting money from foreigners who, under a federal program, get a green card in return for investing $500,000 each. Cereplast, meanwhile, raised $12 million this year through a public debt offering.

‘Lenders are just so scared’

Nestor Correa, vice president and program manager for Pacific Coast Regional Corp., a small-business development group in Koreatown that helps companies secure lending, said his organization is receiving frequent calls from business owners looking for financing.

“Nowadays, the lenders are just so scared of taking a chance,” said Correa, a former banker at Wells Fargo & Co. “This is the toughest time for any business owner to get financing in my 30 years of experience.”

That has certainly proved true for Ken Dymmel.

The president of Pasadena’s JD Audio Visual, which specializes in sound systems and projection equipment, went looking for a $250,000 bank loan beginning in 2009. He needed the money to help bring his 53-year-old company out of a tailspin it had been in since the economy cratered, when business dropped by more than half.

Dymmel’s loan application was rejected by seven banks. He understands why his company is not attractive to lenders, but he believes the lending system is unsuited to today’s business climate.

“They all were very sympathetic but the limitations they had in lending money wouldn’t permit them to lend,” he said. “I understand they have to have criteria, but we found that the criteria didn’t fit the way businesses are facing challenges today. At this point, I don’t see the viability of dealing with banks.”

Dymmel finally gave up on traditional banks this year after securing a low-cost $85,000 loan in April from the Valley Economic Development Center, a non-profit lender in Van Nuys.

It not only took much longer to find than he’d planned, but the loan amount was about one-third of what he needed. He has had to close the company’s Visalia location and lay off nine of his 12 employees.

“What we’re doing right now is cutting every aspect of overhead we can and working as hard as we can to regain the momentum we had for so many years,” Dymmel said.

For many other struggling companies, though, securing financing is something of a cruel Catch-22: They would qualify for a loan only if they were financially well-off enough not to need it.

“Companies that need money, they don’t qualify for a loan,” said Jason DiNapoli, president of 1st Century Bank, a small-business lender in Century City.

From the bankers’ perspective, however, the universe of creditworthy companies has shrunk to the point that most banks have to fight to establish relations with them. When a viable borrower comes along, “it’s extremely competitive” for banks to get that business, DiNapoli said.

While most institutions are more tightfisted than in the heady prerecession days, things could be changing. Business lending is up year over year at 31 of the 50 largest banks in the L.A. market, according to a Business Journal analysis. (See pages 24-32.) Likewise, the number of loans backed by the U.S. Small Business Administration made to L.A. companies in the past year was up 13 percent.

David Malone, chief executive of Pasadena’s Community Bank, acknowledged that some loan types, such as residential mortgages, can be tough to get, but business lending is coming back.

“It’s just a misconception in the market,” Malone said.

Stifled growth

Some business owners, however, say that lending practices today are stifling economic growth since banks tend to lend only to established businesses at the expense of startups and growing enterprises.

“For small companies in new industries … it’s close to impossible to get any kind of real lending,” said Cereplast’s Scheer.

Glenoaks Imaging Professionals Inc., a diagnostic imaging center in Glendale, was started last year by a team of industry veterans. In anticipation of its opening in August, Ashley Shakhbandaryan, the director of operations, went looking for a $200,000 bank loan to pay for an MRI machine.

After being turned down by the first bank, she went to another. And another. And another.

“We got shot down 19 times,” she said. “The reason we had such a difficulty with the loan is because we were a startup business. We didn’t have a track record of owning the business.”

On the 20th try, the company finally got a loan from Pacific Mercantile Bank, a small lender in Costa Mesa.

But with the exception of predictable franchises, such as a Subway sandwich shop, startups today just cannot secure necessary financing, said Pacific Coast Regional’s Correa.

“Startups are very, very, very difficult to finance,” he said. “Banks won’t touch a deal unless it’s more than two years old.”

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